The state audited how I report oil and gas taxes and the report is full of my proprietary contract data — can a co-owner force the Department to hand it over?

Plain-English summary

Meridian Oil, Inc. is a joint-interest owner in thousands of oil and gas wells in the San Juan Basin. As a producer, it reports and pays oil and gas production taxes for itself and on behalf of other working-interest owners in the wells. In 1992 the Department and the State Land Office ran a limited-scope audit of Meridian's tax and royalty payments — focused on the pricing used to set wellhead value — and issued the Meridian Audit Report in 1993. To do the audit, Meridian handed over proprietary contracts showing price, cost, and profit information, and the report ended up saturated with that proprietary data.

Cinco General Partnership, a working-interest co-owner in one of the audited production units (unit 30-06, for which Meridian reported taxes), asked the Department for a copy of the report under the Inspection of Public Records Act. Meridian protested, arguing the Tax Administration Act's confidentiality rules (Section 7-1-8) required the report to be kept secret, and went to court for an injunction.

Hearing Officer Gerald Richardson denied the protest — the Department may release the report to Cinco:

• The public-records request routes through Section 7-1-8. The Inspection of Public Records Act exempts records made confidential "by law" (Section 14-2-1(F)), so the tax confidentiality statute governs.
• (U)(3) is an exception to (U)(2), not a separate category. Section 7-1-8(U)(2) bars releasing contracts and their proprietary information without all parties' consent — which alone would block the report. But Section 7-1-8(U)(3) lets audit workpapers go to "a person having a legal interest in the property that is subject to the audit." Meridian argued (U)(2) covers contractual data and (U)(3) covers only non-contractual data — but that would require reading a word into the statute that isn't there, and it makes no sense for oil and gas audits, which inherently rely on contract data to determine wellhead value. Reading (U)(3) as an exception to (U)(2) is the sensible construction and avoids rendering (U)(3) useless.
• A co-owner has a "legal interest in the property." Meridian said "legal interest" means standing — a real risk of injury — which Cinco lacked because no tax was assessed on its interest. The hearing officer rejected that: ownership is the classic legal interest in property, and the statute keys on an interest in the property subject to the audit, not an interest in the outcome. The audit reviewed Meridian's methodology for the units, including the interests it reported for Cinco, so Cinco qualified.
• Confidentiality policy belongs to the Legislature. The hearing officer shared Meridian's concern that releasing such reports could chill producers' willingness to share proprietary data in audits — but held that the Legislature sets confidentiality policy, it had spoken clearly, and he couldn't substitute his own judgment.

What this means for you

Oil and gas producers who report for other interest owners

Be aware that the audit report the Department prepares on your reporting can be obtained by a working-interest co-owner of the audited property — even one whose interest generated no deficiency — because such a co-owner holds a "legal interest in the property subject to the audit" under Section 7-1-8(U)(3). Since these reports are built from your contracts and pricing data, assume a co-owner (who may be a competitor) could see that information, and factor that into what you hand over and how the report may circulate.

Anyone relying on tax confidentiality

Section 7-1-8's confidentiality is strong but not absolute — it contains specific, enumerated exceptions. For oil and gas audit workpapers, the exception for a person with a legal interest in the audited property is real. Don't assume "it's a tax record, so it's secret"; check whether a statutory exception opens it to a particular requester.

Co-owners and royalty holders

If you hold an ownership or royalty interest in property that the Department audited (even via another party's reporting), you may be entitled to the audit workpapers for that property under Section 7-1-8(U)(3). You don't need to show you were personally assessed — an ownership interest in the audited property can be enough.

Common questions

Q: My audit report is full of my proprietary contract data. Isn't that automatically confidential?
A: Not entirely. Section 7-1-8(U)(2) protects contracts and their proprietary information, but Section 7-1-8(U)(3) allows audit workpapers — even ones containing that data — to be released to a person with a legal interest in the audited property.

Q: The co-owner wasn't assessed any tax. Why can it get my report?
A: Because the statute grants access based on a "legal interest in the property that is subject to the audit," not on standing or exposure to tax. A working-interest ownership is such a legal interest, regardless of the audit's outcome for that interest.

Q: Doesn't releasing this discourage cooperation in audits?
A: The hearing officer agreed that's a legitimate concern, but held that setting confidentiality policy is the Legislature's role. Because the statute clearly allowed release, he could not withhold the report on policy grounds.

Citations and references

Statutes:

• § 7-1-8 NMSA 1978 — confidentiality of taxpayer information, with enumerated exceptions
• § 7-1-8(U)(2) NMSA 1978 — contracts and their proprietary information are not released without all parties' consent
• § 7-1-8(U)(3) NMSA 1978 — audit workpapers may be released to a person with a legal interest in the property subject to the audit
• §§ 14-2-1 to 14-2-12 NMSA 1978 — Inspection of Public Records Act; § 14-2-1(F) excepts records made confidential by other law
• §§ 7-29-2(J), 7-30-2(I), 7-31-2(I), 7-32-2(I) NMSA 1978 — definition of "interest owner" in the oil and gas tax acts
• § 7-29-4.1 NMSA 1978 — oil and gas production tax is imposed on the value of production at the wellhead
• § 7-1-24 NMSA 1978 — a taxpayer's right to file a written protest (basis for jurisdiction)

Cases cited:

• State ex rel. Barela v. New Mexico State Board of Education, 80 N.M. 220, 453 P.2d 583 (1969) — courts will not read into a statute language that is not there
• Southard v. Fox, 113 N.M. 774, 833 P.2d 251 (Ct. App. 1992) — the Legislature is not presumed to enact useless statutes
• State ex rel. Duran v. Anaya, 102 N.M. 609, 698 P.2d 882 (1985) — statutory words are given their ordinary meaning absent a clear contrary intent

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Meridian Oil, Inc.
• Decision PDF: D&O 95-09

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
MERIDIAN OIL, INC. NO. 95-09

DECISION AND ORDER

This matter came on for hearing on July 26, 1995 before Gerald B. Richardson, Hearing

Officer. Meridian Oil, Inc. (hereinafter "Meridian") was represented by Michael B. Campbell,

Esq. and Michael H. Feldewert, Esq. of Campbell, Carr & Berge, P.A. The Taxation and

Revenue Department (hereinafter "Department") was represented by Margaret B. Alcock, Special

Assistant Attorney General. After the hearing, the parties submitted written argument, with the

last submittal being Meridian's reply, which was filed on August 28, 1995 and the matter was

considered submitted for decision at that time. Prior to the formal hearing in this matter, this

Hearing Officer entered a previous Decision and Order on October 31, 1994 which determined

that there was jurisdiction, pursuant to Section 7-1-24 NMSA 1978, to decide Meridian's protest

in this matter.

FINDINGS OF FACT

1. Meridian is a joint interest owner in thousands of oil and natural gas wells in the

San Juan Basin in New Mexico. As an oil and gas owner and producer, Meridian reports and

pays oil and gas production taxes to the Department on behalf of itself and other working interest

owners of the oil and gas wells.

2. Pursuant to New Mexico's various oil and gas production taxes, the producer or

owner of oil and natural gas is required to report and pay oil and gas production taxes to the state.

Although, ultimately, the producer of the oil and gas production is the one legally responsible for

the payment of oil and gas production taxes, the Department also allows the taxes to be paid by

the purchaser and by the well operator.

3. Commencing in April of 1992, the Department and the State Land Office

conducted a limited scope concurrent audit of Meridian to determine whether Meridian had

properly paid New Mexico oil and gas production taxes and state royalties on behalf of itself, its

affiliates and the other working interest owners for which it reported taxes during the designated

audit period. The audit focused on the pricing policies of Meridian and its affiliates and how

those pricing policies affected the determination of the value of the oil and gas production at the

wellhead upon which the oil and gas production taxes are paid. The audit was of limited scope in

that only designated production units were examined and only for designated reporting periods.

The audit period covered the period from April, 1989 through August 1991.

4. From the outset of the audit, Meridian was concerned with protecting the

confidentiality of information which it provided to the auditors which Meridian considered to be

proprietary. At the outset of the audit Meridian prepared and the Department's audit manager

signed a "Confidentiality Agreement" which acknowledges that pursuant to Section 7-1-8 NMSA

1978 it is unlawful to reveal information about Meridian acquired as a result of the audit "except

as permitted in 7-1-8". The confidentiality agreement further provided that documents would be

kept confidential pursuant to Section 19-1-2.1 NMSA 1978.

5. During the course of the concurrent audit, Meridian provided the auditors access to

documents and information which it considered to be proprietary or confidential information.

These documents included copies of contracts between Meridian and its affiliates which contain

price and volume information which would reveal much about Meridian's oil and gas operations.

6. On September 30, 1993 the Department issued the Meridian Audit Report. The

report is in two parts. First, there is a narrative which describes Meridian's operations, its

accounting system,the audit procedures and audit findings. The second part consists of a number

of schedules and attachments in support of the audit narrative.

7. The Meridian audit report concluded that Meridian had underpaid oil and gas

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production taxes upon production owned by Meridian and its affiliates. The audit report found

no under reporting of oil and gas production taxes by Meridian where such taxes were paid on

behalf of other interest owners. A closing agreement was entered into between the Department

and Meridian as a result of the audit report or the assessment issued as a result of the audit report

in October, 1993. The closing agreement settled and resolved any and all issues between the

Department and Meridian resulting from the Meridian audit report.

8. During the audit period, Cinco General Partnership (hereinafter "Cinco") owned a

working interest share in the 30-06 production unit, which was one of the production units

examined in the audit of Meridian. During the audit period, Meridian reported and paid oil and

gas production taxes on behalf of Cinco. The audit did not result in any tax deficiencies being

assessed for the oil and gas production attributable to Cinco's ownership interest in production

unit 30-06.

9. On January 6, 1994, Cinco requested of the Department, pursuant to the Inspection

of Public Records Act, a copy of the Meridian audit report.

10. On January 14, 1994, the Department, by letter to Meridian's counsel, notified it of

Cinco's request for the Meridian audit report. The letter further informed Meridian of the

Department's position that Cinco, as a working interest owner, would be entitled to the audit

report and that it had informed Cinco's representatives that the Department would make a copy of

the audit report available to Cinco on February 1, 1994. The Department's letter stated that notice

was being given to Meridian in order to give it the opportunity to seek judicial construction of the

statutes involved.

11. On February 1, 1994, Meridian filed suit against the Department and the Attorney

General seeking a declaratory judgment and a temporary restraining order and preliminary and

permanent injunction prohibiting the Department from honoring Cinco's request.

12. On February 8, 1994, Meridian filed a protest with the Department, protesting the

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Department's stated intention to release the audit report to Cinco on the basis that the Department

is required to keep the audit report confidential by the provisions of Section 7-1-8(U) NMSA

1978.

13. The Department disputed that Meridian's February 8, 1994 letter constituted a

valid protest pursuant to Section 7-1-24 NMSA and contested the jurisdiction of the Hearing

Officer to determine Meridian's protest. This issue was bifurcated from the determination of the

merits of Meridian's protest and was the subject of an earlier hearing in this matter. By Decision

and Order dated October 31, 1994, it was concluded that Meridian's letter of February 8, 1994

constituted a valid protest pursuant to Section 7-1-24 NMSA 1978.

14. On June 1, 1994, the District Court entered a preliminary injunction which

prohibits the Department from releasing the Meridian Audit Report to Cinco pending the

determination of Meridian's protest herein concerning the confidentiality of the Meridian audit

report under Section 7-1-8 NMSA 1978.

DISCUSSION
Cinco made its request of the Department for the Meridian audit report under the

Inspection of Public Records Act, Sections 14-2-1 through 14-2-12 NMSA 1978. Section 14-2-1

provides that every person has a right to inspect any public records of the state and then sets forth

exceptions to that general presumption of availability to the public. Subsection F of Section
14-2-1 is the exception which applies herein, because it provides an exception where it is

"otherwise provided by law." Section 7-1-8 NMSA 1978 (1993 Repl. Pamp.), is the
confidentiality provision of the Tax Administration Act which governs the confidentiality of

information acquired by the Department about taxpayers. It is the provisions of this statute which
must be construed to determine the issue presented herein, whether the Meridian audit report is

required to be held confidential or whether it must be released to Cinco pursuant its request.

Section 7-1-8 provides for a general presumption of confidentiality of all information

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contained in any tax returns filed with the Department as well as any other information about any

taxpayers acquired by the Department's employees. However, there are then numerous

exceptions to confidentiality which are specifically enumerated in the statute. Set forth below are

the provisions of Section 7-1-8 which are pertinent to the resolution of the issue herein.
It is unlawful for any employee of the department or any former employee of the
department to reveal to any individual other than another employee of the
department any information contained in the return of any taxpayer made pursuant
to any law subject to administration and enforcement under the provisions of the
Tax Administration Act or any other information about any taxpayer acquired as a
result of his employment by the department, except:

• • • • • • • *

U. information with respect to the taxes or tax acts administered pursuant to Subsection
B of Section 7-1-2, except that:

(1) information for or relating to any period prior to July 1, 1985 with respect to
Sections 7-25-1 through 7-25-9 and 7-26-1 through 7-26-9 NMSA 1978 may be
released only to a committee of the legislature for a valid legislative purpose;

(2) contracts and other agreements between the taxpayer and other parties and the
proprietary information contained in such contracts and agreements shall not be
released without the consent of all parties to the contract or agreement; and

(3) audit workpapers and the proprietary information contained in such workpapers
shall not be released except to a person having a legal interest in the property that
is subject to the audit, to a purchaser of products severed from a property subject to
the audit or to the authorized representative of either, but this paragraph does not
prohibit the release of any proprietary information contained in the workpapers
that is also available from returns or other sources not subject to the provisions of
this section;

Subsection U creates an exception to confidentiality for information with respect to taxes

administered pursuant to Section 7-1-2(B) NMSA 1978, which includes the oil and gas

production taxes for which Meridian was audited. Paragraphs (2) and (3) modify the exception to

confidentiality provided in subsection U, and it is to the language of these paragraphs that we turn

to determine the confidentiality of the Meridian audit report.

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Meridian relies on Section 7-1-8 (U)(2), which prohibits the release of contracts and other

agreements between a taxpayer and a second party and the proprietary information contained in

such contracts unless all parties to the contract or agreement agree to the release of such

information. Meridian produced substantial evidence that the Meridian audit report is replete

with proprietary information concerning pricing, costs and even profit margins which was derived

from contracts provided the Department auditors and that this information is spread pretty much

throughout the audit report. Meridian claims that subsection U(2) operates as an absolute bar to

the release of the audit report because contractual and proprietary information is integrated

throughout the audit report. If subsection U(2) were the only provision to be construed with

respect to determining confidentiality, this case would be easily decided, since that section clearly

would prohibit the release of the Meridian audit report.

Subsection U(3) specifically addresses the treatment of audit workpapers. With respect to

audit workpapers and the proprietary information contained in them, they may not be released

"except to a person having a legal interest in the property that is subject to the audit, . . . ." The

first question to be addressed is whether subsection U(3) creates an exception to subsection U(2).

Meridian contends that it does not, and that subsection U(2) deals with contractual proprietary

information and that subsection U(3) deals with non-contractual proprietary information. This

reading is too strained. It requires reading the word, "non-contractual" into subsection U(3).

Courts will not read into a statute language which is not there, particularly if the statute makes

sense as written. State ex rel. Barela v. New Mexico State Board of Education, 80 N.M. 220,

453 P.2d 583 (1969). Meridian's construction also does not make much sense in the context of

the administration of the oil and gas production taxes which were audited. Those taxes are

imposed on the value of oil and gas production at the wellhead. Section 7-29-4.1 NMSA 1978.

Determining this value is the critical factor in determining the amount of tax due. Wellhead

value can be determined by examining contracts for sale of production where the operator and the

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purchaser are not affiliated. Where the production is not sold at the wellhead, contracts are often

examined to determine the costs of processing, transportation, etc., to determine the value at the

wellhead. In other words, contractual information is often extremely important in determining

whether a taxpayer is properly reporting oil and gas production taxes when the taxpayer is audited

by the Department. It is simply not realistic that audit workpapers would not contain contractual

information relative to the valuation of the oil and gas production. Under these circumstances,

subsection U(3) is more reasonably construed as an exception to the prohibition against releasing

contractual information found in subsection U(2). This construction is also supported by another

principal of statutory construction that the legislature will not be presumed to have enacted useless

statutes or amendments. Southard v. Fox, 113 N.M. 774, 833 P.2d 251 (Ct. App. 1992).

Clearly, subsection U(3) allows the disclosure of audit workpapers and the proprietary

information contained therein to certain qualifying requestors. Given the ubiquity of proprietary

contractual information in audit workpapers because of the nature of the taxes being audited, there

would be no point to subsection U(3) if it were not intended to be an exception to subsection U(2).

The next matter to be determined is what is meant by a "legal interest" in the property

subject to audit under Subsection U(3) and whether Cinco such a person. Meridian argues that

"legal interest" should be construed to mean standing, as in a person who is threatened with a real

risk of injury as a result of the proceeding. Meridian argues that Cinco would not meet that test

since no taxes were assessed as a result of the audit of Meridian with respect to how the taxes

were reported on the production of which Cinco owns a working interest. The Department

argues that "legal interest" should be equated with the definition of "interest owner" contained in

New Mexico's oil and gas tax statutes. Sections 7-29-2(J), 7-30-2(I), 7-31-2(I) and 7-32-2(I)

NMSA 1978 (1993 Repl. Pamp.) define "interest owner" to mean:
a person owning an entire or fractional interest of whatsoever kind of nature in the
products at the time of severance from a production unit, or who has a right to
monetary payment that is determined by the value of such products.

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Under this definition, anyone with any ownership interest as well as anyone entitled to royalties

from production would be considered to be an interest owner. It makes some sense to equate

"interest owner" under the oil and gas tax acts with persons with a "legal interest" under the

confidentiality provision of the Tax Administration Act which applies to the oil and gas tax acts,

since those statutes are in pari materia. Even if this approach is not followed, however, I have

little doubt that Cinco qualifies as a holder of a "legal interest." Words in statutes are to be given

their ordinary and usual meaning unless a different intent is clearly indicated. State ex rel.

Duran v. Anaya, 102 N.M. 609, 698 P.2d 882 (1985). It is beyond cavil that an ownership

interest in property is a legal interest in property. Ownership is the most common type of interest

in property which the law recognizes and protects. The other problem with Meridian's equation

of standing and legal interest is that it is not supported by a reading of the language of the statute.

If the legislature had intended to equate the two terms it could have only permitted the release of

audit workpapers to those with a "legal interest in the outcome of the audit" or some other

language limiting release to those who would have a potential tax liability as a result of the audit.

Instead, it chose to write the statute much more broadly, permitting the release of audit

workpapers to those with a "legal interest in the property that is subject to the audit" (emphasis

added).

Meridian makes an additional argument that the only "property that [was] subject to the

audit" was Meridian's "net revenue interest" by which it means Meridian's own working interest in

the nine natural gas production units which were audited by the Department. This argument is

completely without merit. In the first place, under its agreements with the various working

interest owners, which included Cinco, Meridian reported and paid taxes on their behalf on the

production from the units which were audited. There was nothing in the manner by which the

Department handled the audit to support Meridian's narrow interpretation of what was audited.

In fact, in the course of the audit, the Department asked for and was provided by Meridian

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documents which related specifically to how Meridian was reporting on behalf of other interest

owners. Department's Exhibit A. The audit report states that its purpose was "to establish

Meridian's pricing tax and royalty payment methodology" (emphasis added). Meridian audit

report, Exhibit 6, p. 1. Since Meridian admittedly made payment of taxes on behalf of others, a

review of that payment methodology was clearly contemplated in the Department's audit, and in

fact, was reviewed as shown by the evidence presented. The fact that no liability was established

as a result of that review does not negate the fact that it was reviewed as part of the Department's

audit.

Based upon the foregoing discussion, it is concluded that Section 7-1-8(U)(3) operates as

an exception to the confidentiality the audit workpapers which would otherwise apply under

Section 7-1-8, and that the Department is not prohibited from releasing those workpapers to Cinco

under its request made pursuant to the Public Records Act. In arriving at this conclusion I am

mindful of the policy arguments made by Meridian concerning the chilling effect the release of the

audit report may have upon the willingness of oil and gas taxpayers to make their proprietary

information available to the Department upon audit. Meridian provided ample evidence that the

information contained in the audit report exposes its entire business operations to the scrutiny of

Cinco and of other working interest owners, who may also be competitors in the gas production

business. Meridian's concerns with the release of the audit papers are amply justified, and I share

many of the same concerns with the impact of the release of this information upon taxpayer

compliance in the audit process. It is the province of the legislature to establish the policy of the

state with respect to the confidentiality of tax information in the hands of the Department,

however. The legislature has expressed itself rather clearly with respect to the information at

issue in this matter and there is no room for this decision maker to substitute his judgment for that

of the legislature in htis matter.

CONCLUSIONS OF LAW

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1. Pursuant to Section 7-1-24 NMSA 1978, Meridian filed a timely, written protest to

the Department's proposed application of Section 7-1-8 NMSA 1978 to allow the release of the

Meridian audit report to Cinco.

2. Section 7-1-8(U)(3) NMSA 1978 operates as an exception to the prohibition in

Section 7-1-8(U)(2) to the release of contractual information and proprietary information found in

contracts pertaining the New Mexico's oil and gas production taxes.

3. As a working interest owner in the property which was subject to the Department's

audit of Meridian, Cinco holds a "legal interest" in the property which was subject to the

Department's audit, pursuant to Section 7-1-8(U)(3).

4. The Department's audit covered Meridian's method of calculating, reporting and

paying taxes on the enumerated production units both for itself and for the other working interest

owners, including Cinco, for whom Meridian reported and paid taxes.

5. The Department is not prohibited from releasing the Meridian audit report to

Cinco under the provisions of Section 7-1-8 NMSA 1978 (1993 Repl. Pamp.).

For the foregoing reasons, Meridian's protest IS HEREBY DENIED.

DONE, this 21st day of September, 1995.

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